The enormity of the Koch fortune is no mystery. Brothers
Charles and David are each worth more than $40 billion. The electoral influence
of the Koch brothers is similarly well-chronicled. The Kochs are our homegrown
oligarchs; they've cornered the market on Republican politics and are nakedly
attempting to buy Congress and the White House. Their political network helped
finance the Tea Party and powers today's GOP. Koch-affiliated organizations
raised some $400 million during the 2012 election, and aim to spend another
$290 million to elect Republicans in this year's midterms. So far in this
cycle, Koch-backed entities have bought 44,000 political ads to boost
Republican efforts to take back the Senate.

What is less clear is where all that money comes from. Koch
Industries is headquartered in a squat, smoked-glass building that rises above
the prairie on the outskirts of Wichita, Kansas. The building, like the
brothers' fiercely private firm, is literally and figuratively a black box.
Koch touts only one top-line financial figure: $115 billion in annual revenue,
as estimated by Forbes. By that metric, it is larger than IBM, Honda or
Hewlett-Packard and is America's second-largest private company after
agribusiness colossus Cargill. The company's stock response to inquiries from
reporters: "We are privately held and don't disclose this
information."

But Koch Industries is not entirely opaque. The company's
troubled legal history – including a trail of congressional investigations,
Department of Justice consent decrees, civil lawsuits and felony convictions –
augmented by internal company documents, leaked State Department cables,
Freedom of Information disclosures and company whistle­-blowers, combine to
cast an unwelcome spotlight on the toxic empire whose profits finance the
modern GOP.

Under the nearly five-decade reign of CEO Charles Koch, the
company has paid out record civil and criminal environmental penalties. And in
1999, a jury handed down to Koch's pipeline company what was then the largest
wrongful-death judgment of its type in U.S. history, resulting from the
explosion of a defective pipeline that incinerated a pair of Texas teenagers.

The volume of Koch Industries' toxic output is staggering.
According to the University of Massachusetts Amherst's Political Economy
Research Institute, only three companies rank among the top 30 polluters of
America's air, water and climate: ExxonMobil, American Electric Power and Koch
Industries. Thanks in part to its 2005 purchase of paper-mill giant
Georgia-Pacific, Koch Industries dumps more pollutants into the nation's
waterways than General Electric and International Paper combined. The company
ranks 13th in the nation for toxic air pollution. Koch's climate pollution,
meanwhile, outpaces oil giants including Valero, Chevron and Shell. Across its
businesses, Koch generates 24 million metric tons of greenhouse gases a year.

For Koch, this license to pollute amounts to a perverse,
hidden subsidy. The cost is borne by communities in cities like Port Arthur,
Texas, where a Koch-owned facility produces as much as 2 billion pounds of
petrochemicals every year. In March, Koch signed a consent decree with the
Department of Justice requiring it to spend more than $40 million to bring this
plant into compliance with the Clean Air Act.

The toxic history of Koch Industries is not limited to
physical pollution. It also extends to the company's business practices, which
have been the target of numerous federal investigations, resulting in several
indictments and convictions, as well as a whole host of fines and penalties.

And in one of the great ironies of the Obama years, the
president's financial-regulatory reform seems to benefit Koch Industries. The
company is expanding its high-flying trading empire precisely as Wall Street
banks – facing tough new restrictions, which Koch has largely escaped – are
backing away from commodities speculation.

It is often said that
the Koch brothers are in the oil business. That's true as far as it goes – but
Koch Industries is not a major oil producer. Instead, the company has woven
itself into every nook of the vast industrial web that transforms raw fossil
fuels into usable goods. Koch-owned businesses trade, transport, refine and
process fossil fuels, moving them across the world and up the value chain until
they become things we forgot began with hydrocarbons: fertilizers, Lycra, the
innards of our smartphones.

The company controls at least four oil refineries, six
ethanol plants, a natural-gas-fired power plant and 4,000 miles of pipeline.
Until recently, Koch refined roughly five percent of the oil burned in America
(that percentage is down after it shuttered its 85,000-barrel-per-day refinery
in North Pole, Alaska, owing, in part, to the discovery that a toxic solvent
had leaked from the facility, fouling the town's groundwater). From the fossil
fuels it refines, Koch also produces billions of pounds of petrochemicals,
which, in turn, become the feedstock for other Koch businesses. In a journey
across Koch Industries, what enters as a barrel of West Texas Intermediate can
exit as a Stainmaster carpet.

Koch's hunger for growth is insatiable: Since 1960, the
company brags, the value of Koch Industries has grown 4,200-fold, outpacing the
Standard & Poor's index by nearly 30 times. On average, Koch projects to
double its revenue every six years. Koch is now a key player in the fracking
boom that's vaulting the United States past Saudi Arabia as the world's top oil
producer, even as it's endangering America's groundwater. In 2012, a Koch
subsidiary opened a pipeline capable of carrying 250,000 barrels a day of
fracked crude from South Texas to Corpus Christi, where the company owns a
refinery complex, and it has announced plans to further expand its Texas
pipeline operations. In a recent acquisition, Koch bought Frac-Chem, a top
provider of hydraulic fracturing chemicals to drillers. Thanks to the Bush
administration's anti-regulatory­ agenda – which Koch Industries helped craft –
Frac-Chem's chemical cocktails, injected deep under the nation's aquifers, are
almost entirely exempt from the Safe Drinking Water Act.

Koch is also long on the richest – but also the dirtiest and
most carbon-polluting – oil deposits in North America: the tar sands of
Alberta. The company's Pine Bend refinery, near St. Paul, Minnesota, processes
nearly a quarter of the Canadian bitumen exported to the United States – which,
in turn, has created for Koch Industries a lucrative sideline in petcoke
exports. Denser, dirtier and cheaper than coal, petcoke is the dregs of
tar-sands refining. U.S. coal plants are largely forbidden from burning
petcoke, but it can be profitably shipped to countries with lax pollution laws
like Mexico and China. One of the firm's subsidiaries, Koch Carbon, is
expanding its Chicago terminal operations to receive up to 11 million tons of
petcoke for global export. In June, the EPA noted the facility had violated the
Clean Air Act with petcoke particulates that endanger the health of South Side
residents. "We dispute that the two elevated readings" behind the EPA
notice of violation "are violations of anything," Koch's top lawyer,
Mark Holden, told Rolling Stone, insisting that Koch Carbon is a good
neighbor.

Over the past dozen years, the company has quietly acquired
leases for 1.1 million acres of Alberta oil fields, an area larger than Rhode
Island. By some estimates, Koch's direct holdings nearly double ExxonMobil's
and nearly triple Shell's. In May, Koch Oil Sands Operating LLC of Calgary,
Alberta, sought permits to embark on a multi-billion­dollar
tar-sands-extraction operation. This one site is projected to produce 22
million barrels a year – more than a full day's supply of U.S. oil.

Charles Koch, the 78-year-old CEO and chairman of the board
of Koch Industries, is inarguably a business savant. He presents himself as a
man of moral clarity and high integrity. "The role of business is to
produce products and services in a way that makes people's lives better,"
he said recently. "It cannot do so if it is injuring people and harming
the environment in the process."

The Koch family's lucrative blend of pollution, speculation,
law-bending and self-righteousness stretches back to the early 20th century,
when Charles' father first entered the oil business. Fred C. Koch was born in
1900 in Quanah, Texas – a sunbaked patch of prairie across the Red River from
Oklahoma. Fred was the second son of Hotze "Harry" Koch, a Dutch
immigrant who – as recalled in Koch literature – ran "a modest newspaper
business" amid the dusty poverty of Quanah. In the family legend, Fred
Koch emerged from the nothing of the Texas range to found an empire. But like
many stories the company likes to tell about itself, this piece of Koch­lore
takes liberties with the truth. Fred was not a simple country boy, and his
father was not just a small-town publisher. Harry Koch was also a local
railroad baron who used his newspaper to promote the Quanah, Acme & Pacific
railways. A director and founding shareholder of the company, Harry sought to
build a rail line across Texas to El Paso. He hoped to turn Quanah into
"the most important railroad center in northwest Texas and a metropolitan
city of first rank." He may not have fulfilled those ambitions, but Harry
did build up what one friend called "a handsome pile of dinero."

Harry was not just the financial springboard for the Koch
dynasty, he was also its wellspring of far-right politics. Harry editorialized
against fiat money, demanded hangings for "habitual criminals" and
blasted Social Security as inviting sloth. At the depths of the Depression, he
demanded that elected officials in Washington should stop trying to fix the
economy: "Business," he wrote, "has always found a way to
overcome various recessions."

In the company's telling, young Fred was an innovator whose
inventions helped revolutionize the oil industry. But there is much more to
this story. In its early days, refining oil was a dirty and wasteful practice.
But around 1920, Universal Oil Products introduced a clean and hugely
profitable way to "crack" heavy crude, breaking it down under heat
and heavy pressure to boost gasoline yields. In 1925, Fred, who earned a degree
in chemical engineering from MIT, partnered with a former Universal engineer
named Lewis Winkler and designed a near carbon copy of the Universal cracking
apparatus – making only tiny, unpatentable tweaks. Relying on family
connections, Fred soon landed his first client – an Oklahoma refinery owned by
his maternal uncle L.B. Simmons. In a flash, Winkler-Koch Engineering Co. had
contracts to install its knockoff cracking equipment all over the heartland,
undercutting Universal by charging a one-time fee rather than ongoing
royalties.

It was a boom business. That is, until Universal sued in
1929, accusing Winkler­Koch of stealing its intellectual property. With his
domestic business tied up in court, Fred started looking for partners abroad
and was soon doing business in the Soviet Union, where leader Joseph Stalin had
just launched his first Five Year Plan. Stalin sought to fund his country's
industrialization by selling oil into the lucrative European export market. But
the Soviet Union's reserves were notoriously hard to refine. The USSR needed
cracking technology, and the Oil Directorate of the Supreme Council of the
National Economy took a shining to Winkler-Koch – primarily because Koch's
oil-industry competitors were reluctant to do business with totalitarian
Communists.

Between 1929 and 1931, Winkler-Koch built 15 cracking units
for the Soviets. Although Stalin's evil was no secret, it wasn't until Fred
visited the Soviet Union, that these dealings seemed to affect his conscience.
"I went to the USSR in 1930 and found it a land of hunger, misery and
terror," he would later write. Even so, he agreed to give the Soviets the
engineering know-how they would need to keep building more.

Back home, Fred was busy building a life of baronial
splendor. He met his wife, Mary, the Wellesley-educated daughter of a Kansas
City surgeon, on a polo field and soon bought 160 acres across from the Wichita
Country Club, where they built a Tudor­style mansion. As chronicled in Sons
of Wichita, Daniel Schulman's investigation of the Koch dynasty, the
compound was quickly bursting with princes: Frederick arrived in 1933, followed
by Charles in 1935 and twins David and Bill in 1940. Fred Koch lorded over his
domain. "My mother was afraid of my father," said Bill, as were the
four boys, especially first-born Frederick, an artistic kid with a talent for
the theater. "Father wanted to make all his boys into men, and Freddie
couldn't relate to that regime," Charles recalled. Frederick got shipped
East to boarding school and was all but disappeared from Wichita.

With Frederick gone, Charles forged a deep alliance with
David, the more athletic and assertive of the young twins. "I was closer
with David because he was better at everything," Charles has said.

Fred Koch's legal battle with Universal would drag on for
nearly a quarter-century. In 1934, a lower court ruled that Winkler-Koch had
infringed on Universal's technology. But that judgment would be vacated, after
it came out in 1943 that Universal had bought off one of the judges­ handling
the appeal. A year later, the Supreme Court decided that Fred's cracker, by
virtue of small technical differences, did not violate the Universal patent.
Fred countersued on antitrust grounds, arguing that Universal had wielded
patents anti-competitively. He'd win a $1.5 million settlement in 1952.

Around that time, Fred had built a domestic oil empire under
a new company eventually called Rock Island Oil & Refining, transporting crude
from wellheads to refineries by truck or by pipe. In those later years, Fred
also became a major benefactor and board member of the John Birch Society, the
rabidly anti-communist organization founded in 1958 by candy magnate and
virulent racist Robert Welch. Bircher publications warned that the Red endgame
was the creation of the "Negro Soviet­ Republic" in the Deep South.
In his own writing, Fred described integration as a Red plot to "enslave
both the white and black man."

Like his father, Charles Koch attended MIT. After he
graduated in 1959 with two master's degrees in engineering, his father issued
an ultimatum: Come back to Wichita or I'll sell the business. "Papa laid
it on the line," recalled David. So Charles returned home, immersing
himself in his father's world – not simply joining the John Birch Society, but
also opening a Bircher bookstore. The Birchers had high hopes for young
Charles. As Koch family friend Robert Love wrote in a letter to Welch:
"Charles Koch can, if he desires, finance a large operation, however, he
must continually be brought along."

But Charles was already falling under the sway of a
charismatic radio personality named Robert LeFevre, founder of the Freedom
School, a whites-only­ libertarian boot camp in the foothills above Colorado
Springs, Colorado. LeFevre preached a form of anarchic capitalism in which the
individual should be freed from almost all government power. Charles soon had
to make a choice. While the Birchers supported the Vietnam War, his new guru
was a pacifist who equated militarism with out-of-control state power.
LeFevre's stark influence on Koch's thinking is crystallized in a manifesto
Charles wrote for the Libertarian Review in the 1970s, recently
unearthed by Schulman, titled "The Business Community: Resisting
Regulation." Charles lays out principles that gird today's Tea Party
movement. Referring to regulation as "totalitarian," the 41-year-old
Charles claimed business leaders had been "hoodwinked" by the notion
that regulation is "in the public interest." He advocated the
"barest possible obedience" to regulation and implored, "Do not
cooperate voluntarily, instead, resist whenever and to whatever extent you
legally can in the name of justice."

After his father died in 1967, Charles, now in command of
the family business, renamed it Koch Industries. It had grown into one of the
10 largest privately owned firms in the country, buying and selling some 80
million barrels of oil a year and operating 3,000 miles of pipeline. A
black-diamond skier and white-water kayaker, Charles ran the business with an
adrenaline junkie's aggressiveness. The company would build pipelines to
promising oil fields without a contract from the producers and park tanker
trucks beside wildcatters' wells, waiting for the first drops of crude to flow.
"Our willingness to move quickly, absorb more risk," Charles would
write, "enabled us to become the leading crude-oil­gathering
company."

Charles also reconnected with one of his father's earliest
insights: There's big money in dirty oil. In the late 1950s, Fred Koch had
bought a minority stake in a Minnesota refinery that processed heavy Canadian
crude. "We could run the lousiest crude in the world," said his
business partner J. Howard Marshall II – the future Mr. Anna Nicole Smith. Sensing
an opportunity for huge profits, Charles struck a deal to convert Marshall's
ownership stake in the refinery into stock in Koch Industries. Suddenly the
majority owner, the company soon bought the rest of the refinery outright.

Almost from the beginning, Koch Industries' risk-taking
crossed over into recklessness. The OPEC oil embargo hit the company hard. Koch
had made a deal giving the company the right to buy a large share of Qatar's
export crude. At the time, Koch owned five supertankers and had chartered many
others. When the embargo hit, Koch had upward of half a billion dollars in
exposure to tankers and couldn't deliver OPEC oil to the U.S. market, creating
what Charles has called "large losses." Soon, Koch Industries was
caught overcharging American customers. The Ford administration in the summer
of 1974 compelled Koch to pay out more than $20 million in rebates and future
price reductions.

Koch Industries' manipulations were about to get more
audacious. In the late 1970s, the federal government parceled out exploration
tracts, using a lottery in which anyone could score a 10-year lease at just $1
an acre – a game of chance that gave wildcat prospectors the same shot as the
biggest players. Koch didn't like these odds, so it enlisted scores of frontmen
to bid on its behalf. In the event they won the lottery, they would turn over
their leases to the company. In 1980, Koch Industries pleaded guilty to five
felonies in federal court, including conspiracy to commit fraud.

With Republicans and Democrats united in regulating the oil
business, Charles had begun throwing his wealth behind the upstart Libertarian
Party, seeking to transform it into a viable third party. Over the years, he
would spend millions propping up a league of affiliated think tanks and front
groups – a network of Libertarians that became known as the
"Kochtopus."

Charles even convinced David to stand as the Libertarian
Party's vice-presidential candidate in 1980 – a clever maneuver that allowed
David to lavish unlimited money on his own ticket. The Koch-funded 1980
platform was nakedly in the brothers' self-interest – slashing federal
regulatory agencies, offering a 50 percent tax break to top earners, ending the
"cruel and unfair" estate tax and abolishing a $16 billion
"windfall profits" tax on the oil industry. The words of Libertarian
presidential candidate Ed Clark's convention speech in Los Angeles ring across
the decades: "We're sick of taxes," he declared. "We're ready to
have a very big tea party." In a very real sense, the modern Republican
Party was on the ballot that year – and it was running against Ronald Reagan.

Charles' management style and infatuation with far-right
politics were endangering his grip on the company. Bill believed his brothers'
political spending was bad for business. "Pretty soon, we would get the
reputation that the company and the Kochs were crazy," he said.

In late 1980, with Frederick's backing, Bill launched an
unsuccessful battle for control of Koch Industries, aiming to take the company
public. Three years later, Charles and David bought out their brothers for $1.1
billion. But the speed with which Koch Industries paid off the buyout debt left
Bill convinced, but never quite able to prove, he'd been defrauded. He would
spend the next 18 years suing his brothers, calling them "the biggest
crooks in the oil industry."

Bill also shared these concerns with the federal government.
Thanks in part to his efforts, in 1989 a Senate committee investigating Koch
business with Native Americans would describe Koch Oil tactics as "grand
larceny." In the late 1980s, Koch was the largest purchaser of oil from
American tribes. Senate investigators suspected the company was making off with
more crude from tribal oil fields than it measured and paid for. They set up a
sting, sending an FBI agent to coordinate stakeouts of eight remote leases. Six
of them were Koch operations, and the agents reported "oil theft" at
all of them.

One of Koch's gaugers would refer to this as "volume
enhancement." But in sworn testimony before a Texas jury, Phillip Dubose,
a former Koch pipeline manager, offered a more succinct definition:
"stealing." The Senate committee concluded that over the course of
three years Koch "pilfered" $31 million in Native oil; in 1988, the
value of that stolen oil accounted for nearly a quarter of the company's
crude-oil profits. "I don't know how the company could have figures like
that," the FBI agent testified, "and not have top management know
that theft was going on." In his own testimony, Charles offered that
taking oil readings "is a very uncertain art" and that his employees
"aren't rocket scientists." Koch's top lawyer would later paint the
company as a victim of Senate "McCarthyism."

By this time, the Kochs had soured on the Libertarian Party,
concluding that control of a small party would never give them the muscle they
sought in the nation's capital. Now they would spend millions in efforts to
influence – and ultimately take over – the GOP. The work began close to home;
the Kochs had become dedicated patrons of Sen. Bob Dole of Kansas, who ran
interference for Koch Industries in Washington. On the Senate floor in March
1990, Dole gloatingly cautioned against a "rush to judgment" against
Koch, citing "very real concerns about some of the evidence on which the
special committee was basing its findings." A grand jury investigated the
claims but disbanded in 1992, without issuing indictments.

Arizona Sen. Dennis DeConcini was "surprised and
disappointed" at the decision to drop the case. "Our investigation
was some of the finest work the Senate has ever done," he said.
"There was an overwhelming case against Koch." But Koch did not avoid
all punishment. Under the False Claims Act, which allows private citizens to
file lawsuits on behalf of the government, Bill sued the company, accusing it
of defrauding the feds of royalty income on its "volume­enhanced"
purchases of Native oil. A jury concluded Koch had submitted more than 24,000
false claims, exposing Koch to some $214 million in penalties. Koch later settled,
paying $25 million.

Self­interest continued to define Koch Industries'
adventures in public policy. In the early 1990s, in a high-profile initiative
of the first-term Clinton White House, the administration was pushing for a
levy on the heat content of fuels. Known as the BTU tax, it was the earliest
attempt by the federal government to recoup damages from climate polluters. But
Koch Industries could not stand losing its most valuable subsidy: the public
policy that allowed it to treat the atmosphere as an open sewer. Richard Fink,
head of Koch Company's Public Sector and the longtime mastermind of the Koch
brothers' political empire, confessed to The Wichita Eagle in 1994 that
Koch could not compete if it actually had to pay for the damage it did to the
environment: "Our belief is that the tax, over time, may have destroyed
our business."

To fight this threat, the Kochs funded a
"grassroots" uprising – one that foreshadowed the emergence, decades
later, of the Tea Party. The effort was run through Citizens for a Sound
Economy, to which the brothers had spent a decade giving nearly $8 million to
create what David Koch called "a sales force" to communicate the
brothers' political agenda through town hall meetings and anti-tax rallies
designed to look like spontaneous demonstrations. In 1994, David Koch bragged
that CSE's campaign "played a key role in defeating the administration's
plans for a huge and cumbersome BTU tax."

Despite the company's increasingly sophisticated political
and public-relations operations, Charles' philosophy of regulatory resistance
was about to bite Koch Industries – in the form of record civil and criminal
financial penalties imposed by the Environmental Protection Agency.

Koch entered the 1990s on a pipeline-buying spree. By 1994,
its network measured 37,000 miles. According to sworn testimony from former
Koch employees, the company operated its pipelines with almost complete
disregard for maintenance. As Koch employees understood it, this was in keeping
with their CEO's trademarked business philosophy, Market­Based Management.

For Charles, MBM – first communicated to employees in 1991 –
was an attempt to distill the business practices that had grown Koch into one
of the largest oil businesses in the world. To incentivize workers, Koch gives
employees bonuses that correlate to the value they create for the company.
"Salary is viewed only as an advance on compensation for value," Koch
wrote, "and compensation has an unlimited upside."

To prevent the stagnation that can often bog down big
enterprises, Koch was also determined to incentivize risk-taking. Under MBM,
Koch Industries books opportunity costs – "profits foregone from a missed
opportunity" – as though they were actual losses on the balance sheet.
Koch employees who play it safe, in other words, can't strike it rich.

On paper, MBM sounds innovative and exciting. But in Koch's
hyperaggressive corporate culture, it contributed to a series of environmental
disasters. Applying MBM to pipeline maintenance, Koch employees calculated that
the opportunity cost of shutting down equipment to ensure its safety was
greater than the profit potential of pushing aging pipe to its limits.

The fact that preventive pipeline maintenance is required by
law didn't always seem to register. Dubose, a 26-year Koch veteran who oversaw
pipeline areas in Louisiana, would testify about the company's lax attitude
toward maintenance. "It was a question of money. It would take away from
our profit margin." The testimony of another pipeline manager would echo
that of Dubose: "Basically, the philosophy was 'If it ain't broke, don't
work on it.'"

When small spills occurred, Dubose testified, the company
would cover them up. He recalled incidents in which the company would use the
churn of a tugboat's engine to break up waterborne spills and "just kind
of wash that thing on down, down the river." On land, Dubose said,
"They might pump it [the leaked oil] off into a drum, then take a shovel
and just turn the earth over." When larger spills were reported to authorities,
the volume of the discharges was habitually low-balled, according to Dubose.

Managers pressured employees to falsify pipeline-maintenance
records filed with federal authorities; in a sworn affidavit, pipeline worker
Bobby Conner recalled arguments with his manager over Conner's refusal to file
false reports: "He would always respond with anger," Conner said,
"and tell me that I did not know how to be a Koch employee." Conner
was fired and later settled a wrongful-termination suit with Koch Gateway
Pipeline. Dubose testified that Charles was not in the dark about the company's
operations. "He was in complete control," Dubose said. "He was
the one that was line-driving this Market-Based Management at meetings."

Before the worst spill from this time, Koch employees had
raised concerns about the integrity of a 1940s-era pipeline in South Texas. But
the company not only kept the line in service, it increased the pressure to
move more volume. When a valve snapped shut in 1994, the brittle pipeline
exploded. More than 90,000 gallons of crude spewed into Gum Hollow Creek,
fouling surrounding marshlands and both Nueces and Corpus Christi bays with a
12-mile oil slick.

By 1995, the EPA had seen enough. It sued Koch for gross
violations of the Clean Water Act. From 1988 through 1996, the company's
pipelines spilled 11.6 million gallons of crude and petroleum products.
Internal Koch records showed that its pipelines were in such poor condition
that it would require $98 million in repairs to bring them up to industry
standard.

Ultimately, state and federal agencies forced Koch to pay a
$30 million civil penalty – then the largest in the history of U.S.
environmental law – for 312 spills across six states. Carol Browner, the former
EPA administrator, said of Koch, "They simply did not believe the law
applied to them." This was not just partisan rancor. Texas Attorney
General John Cornyn, the future Republican senator, had joined the EPA in
bringing suit against Koch. "This settlement and penalty warn polluters
that they cannot treat oil spills simply as the cost of doing business,"
Cornyn said. (The Kochs seem to have no hard feelings toward their one-time
tormentor; a lobbyist for Koch was the number-two bundler for Cornyn's primary
campaign this year.)

Koch wasn't just cutting corners on its pipelines. It was
also violating federal environmental law in other corners of the empire.
Through much of the 1990s at its Pine Bend refinery in Minnesota, Koch spilled
up to 600,000 gallons of jet fuel into wetlands near the Mississippi River.
Indeed, the company was treating the Mississippi as a sewer, illegally dumping
ammonia-laced wastewater into the river – even increasing its discharges on
weekends when it knew it wasn't being monitored. Koch Petroleum Group
eventually pleaded guilty to "negligent discharge of a harmful quantity of
oil" and "negligent violation of the Clean Water Act," was
ordered to pay a $6 million fine and $2 million in remediation costs, and
received three years' probation. This facility had already been declared a
Superfund site in 1984.

In 2000, Koch was hit with a 97-count indictment over claims
it violated the Clean Air Act by venting massive quantities of benzene at a
refinery in Corpus Christi – and then attempted to cover it up. According to
the indictment, Koch filed documents with Texas regulators indicating releases
of just 0.61 metric tons of benzene for 1995 – one-tenth of what was allowed
under the law. But the government alleged that Koch had been informed its true
emissions that year measured 91 metric tons, or 15 times the legal limit.

By the time the case came to trial, however, George W. Bush
was in office and the indictment had been significantly pared down – Koch faced
charges on only seven counts. The Justice Department settled in what many
perceived to be a sweetheart deal, and Koch pleaded guilty to a single felony
count for covering up the fact that it had disconnected a key pollution-control
device and did not measure the resulting benzene emissions – receiving five
years' probation. Despite skirting stiffer criminal prosecution, Koch was
handed $20 million in fines and reparations – another historic judgment.

On the day before Danielle Smalley was to leave for college,
she and her friend Jason Stone were hanging out in her family's mobile home.
Seventeen years old, with long chestnut hair, Danielle began to feel nauseated.
"Dad," she said, "we smell gas." It was 3:45 in the
afternoon on August 24th, 1996, near Lively, Texas, some 50 miles southeast of
Dallas. The Smalleys were too poor to own a telephone. So the teens jumped into
her dad's 1964 Chevy pickup to alert the authorities. As they drove away, the
truck stalled where the driveway crossed a dry creek bed. Danielle cranked the
ignition, and a fireball engulfed the truck. "You see two children burned
to death in front of you – you never forget that," Danielle's father, Danny,
would later tell reporters.

Unknown to the Smalleys, a decrepit Koch pipeline carrying
liquid butane – literally, lighter fluid – ran through their subdivision. It
had ruptured, filling the creek bed with vapor, and the spark from the pickup's
ignition had set off a bomb. Federal investigators documented both "severe
corrosion" and "mechanical damage" in the pipeline. A National
Transportation Safety Board report would cite the "failure of Koch
Pipeline Company LP to adequately protect its pipeline from corrosion."

Installed in the early Eighties, the pipeline had been out
of commission for three years. When Koch decided to start it up again in 1995,
a water-pressure test had blown the pipe open. An inspection of just a few
dozen miles of pipe near the Smal­ley home found 538 corrosion defects. The
industry's term of art for a pipeline in this condition is Swiss cheese,
according to the testimony of an expert witness – "essentially the
pipeline is gone."

Koch repaired only 80 of the defects – enough to allow the
pipeline to withstand another pressure check – and began running explosive
fluid down the line at high pressure in January 1996. A month later, employees
discovered that a key anti­corrosion system had malfunctioned, but it was never
fixed. Charles Koch had made it clear to managers that they were expected to
slash costs and boost profits. In a sternly worded memo that April, Charles had
ordered his top managers to cut expenditures by 10 percent "through the
elimination of waste (I'm sure there is much more waste than that)" in
order to increase pre-tax earnings by $550 million a year.

The Smalley trial underscored something Bill Koch had said
about the way his brothers ran the company: "Koch Industries has a
philosophy that profits are above everything else." A former Koch manager,
Kenoth Whitstine, testified to incidents in which Koch Industries placed
profits over public safety. As one supervisor had told him, regulatory fines
"usually didn't amount to much" and, besides, the company had "a
stable full of lawyers in Wichita that handled those situations." When
Whitstine told another manager he was concerned that unsafe pipelines could
cause a deadly accident, this manager said that it was more profitable for the
company to risk litigation than to repair faulty equipment. The company could
"pay off a lawsuit from an incident and still be money ahead," he
said, describing the principles of MBM to a T.

At trial, Danny Smalley asked for a judgment large enough to
make the billionaires feel pain: "Let Koch take their child out there and
put their children on the pipeline, open it up and let one of them die,"
he told the jury. "And then tell me what that's worth." The jury was
emphatic, awarding Smalley $296 million – then the largest wrongful-death
judgment in American legal history. He later settled with Koch for an
undisclosed sum and now runs a pipeline-safety foundation in his daughter's
name. He declined to comment for this story. "It upsets him too
much," says an associate.

The official Koch line is that scandals that caused the
company millions in fines, judgments and penalties prompted a change in
Charles' attitude of regulatory resistance. In his 2007 book, The Science of
Success, he begrudgingly acknowledges his company's recklessness.
"While business was becoming increasingly regulated," he reflects,
"we kept thinking and acting as if we lived in a pure market economy. The
reality was far different."

Charles has since committed Koch Industries to obeying
federal regulations. "Even when faced with laws we think are
counterproductive," he writes, "we must first comply."
Underscoring just how out of bounds Koch had ventured in its corporate culture,
Charles admits that "it required a monumental undertaking to integrate
compliance into every aspect of the company." In 2000, Koch Petroleum
Group entered into an agreement with the EPA and the Justice Department to
spend $80 million at three refineries to bring them into compliance with the
Clean Air Act. After hitting Koch with a $4.5 million penalty, the EPA granted
the company a "clean slate" for certain past violations.

Then George W. Bush entered the White House in 2001, his
campaign fattened with Koch money. Charles Koch may decry cronyism as
"nothing more than welfare for the rich and powerful," but he put his
company to work, hand in glove, with the Bush White House. Correspondence,
contacts and visits among Koch Industries representatives and the Bush White
House generated nearly 20,000 pages of records, according to a Rolling Stone
FOIA request of the George W. Bush Presidential Library. In 2007, the
administration installed a fiercely anti-regulatory academic, Susan Dudley, who
hailed from the Koch-funded Mercatus Center at George Mason University, as its
top regulatory official.

Today, Koch points to awards it has won for safety and
environmental excellence. "Koch companies have a strong record of
compliance," Holden, Koch's top lawyer, tells Rolling Stone.
"In the distant past, when we failed to meet these standards, we took
steps to ensure that we were building a culture of 10,000 percent compliance,
with 100 percent of our employees complying 100 percent." To reduce its
liability, Koch has also unwound its pipeline business, from 37,000 miles in
the late 1990s to about 4,000 miles. Of the much smaller operation, he adds,
"Koch's pipeline practice and operations today are the best in the
industry."

But even as compliance began to improve among its industrial
operations, the company aggressively expanded its trading activities into the
Wild West frontier of risky financial instruments. In 2000, the Commodity
Futures Modernization Act had exempted many of these products from regulation,
and Koch Industries was among the key players shaping that law. Koch joined up
with Enron, BP, Mobil and J. Aron – a division of Goldman Sachs then run by
Lloyd Blankfein – in a collaboration called the Energy Group. This corporate
alliance fought to prohibit the federal government from policing oil and gas
derivatives. "The importance of derivatives for the Energy Group
companies . . . cannot be overestimated," the group's lawyer wrote to the
Commodity Futures Trading Commission in 1998. "The success of this
business can be completely undermined by . . . a costly regulatory regime that
has no place in the energy industry."

Koch had long specialized in "over-the-counter" or
OTC trades – private, unregulated contracts not disclosed on any centralized
exchange. In its own letter to the CFTC, Koch identified itself as "a
major participant in the OTC derivatives market," adding that the company
not only offered "risk-management tools for its customers" but also
traded "for its own account." Making the case for what would be known
as the Enron Loophole, Koch argued that any big firm's desire to "maintain
a good reputation" would prevent "widespread abuses in the OTC
derivatives market," a darkly hilarious claim, given what would become not
only of Enron, but also Bear Stearns, Lehman Brothers and AIG.

The Enron Loophole became law in December 2000 – pushed
along by Texas Sen. Phil Gramm, giving the Energy Group exactly what it wanted.
"It completely exempted energy futures from regulation," says Michael
Greenberger, a former director of trading and markets at the CFTC. "It
wasn't a matter of regulators not enforcing manipulation or excessive
speculation limits – this market wasn't covered at all. By law."

Before its spectacular collapse, Enron would use this
loophole in 2001 to help engineer an energy crisis in California, artificially
constraining the supply of natural gas and power generation, causing price
spikes and rolling blackouts. This blatant and criminal market manipulation has
become part of the legend of Enron. But Koch was caught up in the debacle. The
CFTC would charge that a partnership between Koch and the utility Entergy had,
at the height of the California crisis, reported fake natural-gas trades to
reporting firms and also "knowingly reported false prices and/or
volumes" on real trades.

One of 10 companies punished for such schemes, Entergy-Koch
avoided prosecution by paying a $3 million fine as part of a 2004 settlement
with the CFTC, in which it did not admit guilt to the commission's charges but
is barred from maintaining its innocence.

Trading, which had long been peripheral to the company's
core businesses, soon took center stage. In 2002, the company launched a
subsidiary, Koch Supply & Trading. KS&T got off to a rocky start.
"A series of bad trades," writes a Koch insider, "boiled over in
early 2004 when a large 'sure bet' crude-oil trade went south, resulting in a
quick, multimillion loss." But Koch traders quickly adjusted to the
reality that energy markets were no longer ruled just by supply and demand –
but by rich speculators trying to game the market. Revamping its strategy, Koch
Industries soon began bragging of record profits. From 2003 to 2012, KS&T
trading volumes exploded – up 450 percent. By 2009, KS&T ranked among the
world's top-five oil traders, and by 2011, the company billed itself as
"one of the leading quantitative traders" – though Holden now says
it's no longer in this business.

Since Koch Industries aggressively expanded into high
finance, the net worth of each brother has also exploded – from roughly $4
billion in 2002 to more than $40 billion today. In that period, the company
embarked on a corporate buying spree that has taken it well beyond petroleum.
In 2005, Koch purchased Georgia Pacific for $21 billion, giving the company a
familiar, expansive grip on the industrial web that transforms Southern pine
into consumer goods – from plywood sold at Home Depot to brand-name products
like Dixie Cups and Angel Soft toilet paper. In 2013, Koch leapt into high
technology with the $7 billion acquisition of Molex, a manufacturer of more
than 100,000 electronics components and a top supplier to smartphone makers,
including Apple.

Koch Supply & Trading makes money both from physical
trades that move oil and commodities across oceans as well as in
"paper" trades involving nothing more than high-stakes bets and cash.
In paper trading, Koch's products extend far beyond simple oil futures. Koch
pioneered, for sale to hedge funds, "volatility swaps," in which the
actual price of crude is irrelevant and what matters is only the
"magnitude of daily fluctuations in prices." Steve Mawer, until
recently the president of KS&T, described parts of his trading operation as
"black-box stuff."

Like a casino that bets at its own craps table, Koch engages
in "proprietary trading" – speculating for the company's own bottom
line. "We're like a hedge fund and a dealer at the same time,"
bragged Ilia Bouchouev, head of Koch's derivatives trading in 2004. "We
can both make markets and speculate." The company's many tentacles in the
physical oil business give Koch rich insight into market conditions and disruptions
that can inform its speculative bets. When oil prices spiked to record heights
in 2008, Koch was a major player in the speculative markets, according to
documents leaked by Vermont Sen. Bernie Sanders, with trading volumes rivaling
Wall Street giants like Citibank. Koch rode a trader-driven frenzy – detached
from actual supply and demand – that drove prices above $147 a barrel in July
2008, battering a global economy about to enter a free fall.

Only Koch knows how much money Koch reaped during this price
spike. But, as a proxy, consider the $20 million Koch and its subsidiaries
spent lobbying Congress in 2008 – before then, its biggest annual lobbying
expense had been $5 million – seeking to derail a raft of consumer-protection
bills, including the Federal Price Gouging Prevention Act, the Stop Excessive
Energy Speculation Act of 2008, the Prevent Unfair Manipulation of Prices Act
of 2008 and the Close the Enron Loophole Act.

In comments to the Federal Trade Commission, Koch lobbyists
defended the company's right to rack up fantastic profits at the expense of
American consumers. "A mere attempt to maximize profits cannot constitute
market manipulation," they wrote, adding baldly, "Excessive profits
in the face of shortages are desirable."

When the global economy crashed in 2008, so did oil prices.
By December, crude was trading more than $100 lower per barrel than it had just
months earlier – around $30. At the same time, oil traders anticipated that
prices would eventually rebound. Futures contracts for delivery of oil in
December 2009 were trading at nearly $55 per barrel. When future delivery is
more valuable than present inventory, the market is said to be "in
contango." Koch exploited the contango market to the hilt. The company
leased nine supertankers and filled them with cut-rate crude and parked them
quietly offshore in the Gulf of Mexico, banking virtually risk-free profits by
selling contracts for future delivery.

All in, Koch took about 20 million barrels of oil off the
market, putting itself in a position to bet on price disruptions the company
itself was creating. Thanks to these kinds of trading efforts, Koch could boast
in a 2009 review that "the performance of Koch Supply & Trading
actually grew stronger last year as the global economy worsened." The cost
for those risk-free profits was paid by consumers at the pump. Estimates pegged
the cost of the contango trade by Koch and others at up to 40 cents a gallon.

Artificially constraining oil supplies is not the only
source of dark, unregulated profit for Koch Industries. In the years after
George W. Bush branded Iran a member of the "Axis of Evil," the Koch
brothers profited from trade with the state sponsor of terror and reckless
would-be nuclear power. For decades, U.S. companies have been forbidden from
doing business with the Ayatollahs, but Koch Industries exploited a loophole in
1996 sanctions that made it possible for foreign subsidiaries of U.S. companies
to do some business in Iran.

In the ensuing years, according to Bloomberg Markets, the
German and Italian arms of Koch-Glitsch, a Koch subsidiary that makes equipment
for oil fields and refineries, won lucrative contracts to supply Iran's Zagros
plant, the largest methanol plant in the world. And thanks in part to Koch,
methanol is now one of Iran's leading non-oil exports. "Every single
chance they had to do business with Iran, or anyone else, they did," said
Koch whistle-blower George Bentu. Having signed on to work for a company that
lists "integrity" as its top value, Bentu added, "You feel
totally betrayed. Everything Koch stood for was a lie."

Koch reportedly kept trading with Tehran until 2007 – after
the regime was exposed for supplying IEDs to Iraqi insurgents killing U.S.
troops. According to lawyer Holden, Koch has since "decided that none of
its subsidiaries would engage in trade involving Iran, even where such trade is
permissible under U.S. law."

These days, Koch's most disquieting foreign dealings are in
Canada, where the company has massive investments in dirty tar sands. The
company's 1.1 million acres of leases in northern Alberta contain reserves of
economically recoverable oil numbering in the billions of barrels. With these
massive leaseholdings, Koch is poised to continue profiting from Canadian crude
whether or not the Keystone XL pipeline gains approval, says Andrew Leach, an
energy and environmental economist at the business school of the University of
Alberta.

Counterintuitively, approval of Keystone XL could actually
harm one of Koch's most profitable businesses – its Pine Bend refinery in
Minnesota. Because tar-sands crude presently has no easy outlet to the global
market, there's a glut of Canadian oil in the midcontinent, and Koch's refinery
is a beneficiary of this oversupply; the resulting discount can exceed $20 a
barrel compared to conventional crude. If it is ever built, the Keystone XL
pipeline will provide a link to Gulf Coast refineries – and thus the global
export market, which would erase much of that discount and eat into company
profit margins.

Leach says Koch Industries' tar-sands leaseholdings have
them hedged against the potential approval of Keystone XL. The pipeline would
increase the value of Canadian tar-sands deposits overnight. Koch could then
profit handsomely by flipping its leases to more established producers.
"Optimizing asset value through trading," Koch literature says of
these and other holdings, is a "key" company strategy.

The one truly bad outcome for Koch would be if Keystone XL
were to be defeated, as many environmentalists believe it must be. "If the
signal that sends is that no new pipelines will be built across the U.S. border
for carrying oil-sands product," Leach says, "that's going to have an
impact not just on Koch leases, but on everybody's asset value in oil
sands." Ironically, what's best for Koch's tar-sands interests is what the
Obama administration is currently delivering: "They're actually ahead if
Keystone XL gets delayed a while but hangs around as something that still might
happen," Leach says.

The Dodd-Frank bill was supposed to put an end to economy­endangering
speculation in the $700 trillion global derivatives market. But Koch has
managed to defend – and even expand – its turf, trading in largely unregulated
derivatives, once dubbed "financial weapons of mass destruction" by
billionaire Warren Buffett.

In theory, the Enron Loophole is no longer open – the
government now has the power to police manipulation in the market for energy
derivatives. But the Obama administration has not yet been able to come up with
new rules that actually do so. In 2011, the CFTC mandated "position
limits" on derivative trades of oil and other commodities. These would
have blocked any single speculator from owning futures contracts representing
more than a quarter of the physical market – reducing the danger of
manipulation. As part of the International Swaps and Derivatives Association,
which also reps many Wall Street giants including Goldman Sachs and JPMorgan
Chase, Koch fought these new restrictions. ISDA sued to block the position
limits – and won in court in September 2012. Two years later, CFTC is still
spinning its wheels on a replacement. Industry traders like Koch are,
Greenberger says, "essentially able to operate as though the Enron
Loophole were still in effect."

Koch is also reaping the benefits from Dodd-Frank's impacts
on Wall Street. The so-called Volcker Rule, implemented at the end of last
year, bans investment banks from "proprietary trading" – investing on
their own behalf in securities and derivatives. As a result, many Wall Street
banks are unloading their commodities-trading units. But Volcker does not apply
to nonbank traders like Koch. They're now able to pick up clients who might
previously have traded with JPMorgan. In its marketing materials for its
trading operations, Koch boasts to potential clients that it can provide
"physical and financial market liquidity at times when others pull
back." Koch also likely benefits from loopholes that exempt the company
from posting collateral for derivatives trades and allow it to continue trading
swaps without posting the transactions to a transparent electronic exchange.
Though competitors like BP and Cargill have registered with the CFTC as swaps
dealers – subjecting their trades to tightened regulation – Koch conspicuously
has not. "Koch is compliant with all CFTC regulations, including those
relating to swaps dealers," says Holden, the Koch lawyer.

That a massive company with such a troubling record as Koch
Industries remains unfettered by financial regulation should strike fear in the
heart of anyone with a stake in the health of the American economy. Though Koch
has cultivated a reputation as an economically conservative company, it has
long flirted with danger. And that it has not suffered a catastrophic loss in
the past 15 years would seem to be as much about luck as about skillful
management.

The Kochs have brushed up against some of the major debacles
of the crisis years. In 2007, as the economy began to teeter, Koch was gearing
up to plunge into the market for credit default swaps, even creating an
affiliate, Koch Financial Products, for that express purpose. KFP secured a AAA
rating from Moody's and reportedly sought to buy up toxic assets at the center
of the financial crisis at up to 50-times leverage. Ultimately, Koch Industries
survived the experiment without losing its shirt.

More recently, Koch was exposed to the fiasco at MF Global,
the disgraced brokerage firm run by former New Jersey Gov. Jon Corzine that
improperly dipped into customer accounts to finance reckless bets on European
debt. Koch, one of MF Global's top clients, reportedly told trading partners it
was switching accounts about a month before the brokerage declared bankruptcy –
then the eighth-largest in U.S. history. Koch says the decision to pull its
funds from MF Global was made more than a year before. While MF's small-fry
clients had to pick at the carcass of Corzine's company to recoup their assets,
Koch was already swimming free and clear.

Because it's private, no one outside of Koch Industries
knows how much risk Koch is taking – or whether it could conceivably create
systemic risk, a concern raised in 2013 by the head of the Futures Industry
Association. But this much is for certain: Because of the loopholes in
financial-regulatory reform, the next company to put the American economy at
risk may not be a Wall Street bank but a trading giant like Koch. In 2012, Gary
Gensler, then CFTC chair, railed against the very loopholes Koch appears to be
exploiting, raising the specter of AIG. "[AIG] had this massive risk built
up in its derivatives just because it called itself an insurance company rather
than a bank," Gensler said. When Congress adopted Dodd-Frank, Gensler
added, it never intended to exempt financial heavy hitters just because
"somebody calls themselves an insurance company.”

In "the science of success," Charles Koch
highlights the problems created when property owners "don't benefit from
all the value they create and don't bear the full cost from whatever value they
destroy." He is particularly concerned about the "tragedy of the
commons," in which shared resources are abused because there's no
individual accountability. "The biggest problems in society," he
writes, "have occurred in those areas thought to be best controlled in
common: the atmosphere, bodies of water, air. . . ."

But in the real world, Koch Industries has used its
political might to beat back the very market-based mechanisms – including a
cap-and-trade market for carbon pollution – needed to create the ownership
rights for pollution that Charles says would improve the functioning of
capitalism.

In fact, it appears the very essence of the Koch business
model is to exploit breakdowns in the free market. Koch has profited precisely
by dumping billions of pounds of pollutants into our waters and skies –
essentially for free. It racks up enormous profits from speculative trades
lacking economic value that drive up costs for consumers and create risks for
our economy.

The Koch brothers get richer as the costs of what Koch
destroys are foisted on the rest of us – in the form of ill health, foul water
and a climate crisis that threatens life as we know it on this planet. Now
nearing 80 – owning a large chunk of the Alberta tar sands and using his
billions to transform the modern Republican Party into a protection racket for
Koch Industries' profits – Charles Koch is not about to see the light. Nor does
the CEO of one of America's most toxic firms have any notion of slowing down.
He has made it clear that he has no retirement plans: "I'm going to ride
my bicycle till I fall off."

Friday, September 5, 2014

Only the richest Americans enjoyed gains in income from the economic recovery during 2010-2013, as median earnings fell for all others, a report from the Federal Reserve showed.

Median income adjusted for inflation rose 2 percent to $223,200 for the wealthiest 10 percent of households from 2010 to 2013, the Fed said yesterday from Washington in its Survey of Consumer Finances, taken every three years. The bottom 60 percent saw the biggest declines.

Household wealth and incomes have become increasingly stratified during the recovery, thanks in part to gains in the stock and housing markets that have been boosted by the Fed’s unprecedented stimulus. The labor market has been slower to progress, with wages remaining stagnant for many workers. The Fed survey suggests much of the divide is driven by the changing nature of work in America.

“What we have seen in recent years is the polarization of the labor market” as job growth is skewed toward the highest and lowest skill levels, hollowing out the middle, said Dean Maki, chief U.S. economist at Barclays PLC in New York. “That seems to be coming through in the Fed data.”

Low-Skill Work

As jobs that require some skills disappear or are replaced with technology, more workers are left competing for low-skill jobs, depressing wages further. Average hourly earnings for production and non-supervisory workers, for example, are up just 6 percent before inflation in the three-year period of the survey.

The median, or mid-point, income for all families fell 5 percent from 2010 to 2013, while mean, or average, income climbed 4 percent, the data show. That’s “consistent with increasing income concentration during this period,” the report stated.

Fed Chair Janet Yellen has made reducing labor market slack a signature goal of her leadership at the Fed. She called rising disparity in both incomes and wealth “very disturbing” at a May hearing before the Joint Economic Committee of Congress.

The latest Fed survey “reveals substantial disparities in the evolution of income and net worth” since 2010.

Piketty’s Best-Seller

The widening gap between rich and poor has come into sharp focus among policy makers and economists around the world, partly due to Thomas Piketty’s best-seller, “Capital in the 21st Century.” The French economist examined centuries of data on countries including the U.S., Sweden, France and the U.K. to show that returns on capital in excess of economic growth lead to greater wealth disparities.

The 2013 Fed survey found median net worth fell 2 percent to $81,200 from 2010 to 2013, while mean net worth was little changed at $534,600. Gains in income and wealth aren’t confined to just the top 1 percent of families, the Fed researchers wrote.

The Fed data showed that the share of income received by the top 3 percent of families rebounded to 30.5 percent in 2013, from 27.7 percent in 2010. For the next highest 7 percent, though, the share of income hadn’t changed during the previous quarter-century, “sitting slightly below 17 percent” in both 1989 and 2013.

Household Assets

Households with access to assets such as homes and stock portfolios have found their wealth buoyed over the last three years. The Standard & Poor’s 500 Index (SPX) climbed 47 percent in the three years ended December 2013, while the S&P/Case Shiller index of property values climbed 13.4 percent.

Americans without such assets may have found the recovery in their finances slower going, partly because of a labor market that’s been gradual in gaining momentum.

With a “substantial degree” of labor market slack, “the need for extraordinary accommodation is unambiguous,” Yellen said in an Aug. 22 speech at the Kansas City Fed’s economic conference in Jackson Hole, Wyoming.

The top 10 percent of families by wealth got 46.7 percent of their pre-tax income from wages in 2013, down from 55.8 percent in 2010, the survey found. The share earned from capital gains climbed to 10.6 percent from 2.3 percent.

That compares with the 73.7 percent received from wages by the poorest households in 2013, a decrease from 75.9 percent three years earlier. Those families received less than 0.05 percent of their incomes from capital gains last year.

There were also disparities in changes of median and mean family business equity. The survey showed that median family business equity fell by 20 percent. The mean value of business equity rose 15 percent.

“This change indicates that losses in business equity were not equally distributed, and many business-owning families experienced large gains, while the median business-owning family experienced a loss,” the report said.

Retirement Accounts

The proportion of families with retirement accounts decreased 1.2 percentage points to 49.2 percent during the three years ended 2013, according to the report. The decline was driven by those in the bottom half of the income distribution, while participation among families in the top 10 percent increased.

Households have spent much of the economic expansion cleaning up their balance sheets, and many remain cautious about taking out more loans. The share of families holding any type of debt declined to 74.5 percent in 2013 from 74.9 percent in 2010, while the median value of the debt fell 20 percent to $60,400.

The share of those with mortgages or other home-secured debt declined to 42.9 percent from 47 percent in the same time frame. That overshadowed a drop in the percentage of families who owned a home, which fell to 65.2 percent last year from 67.3 percent in 2010.

Credit-Card Debt

Credit-card debt as a share of household borrowings was at 2.4 percent, a record low in data from the consumer finances survey going back to 1989. The median family credit card balance was $2,300 last year, down from $2,800 in 2010.

Fed economists conduct the survey once every three years to produce a snapshot of household balance sheets, pensions, income and demographics that’s more detailed than broader reports about the economy. The surveys allow comparisons over time, with consistent methodology since 1989.

The Fed defines income as wages, self-employment and business income, taxable and tax-exempt interest, dividends, realized capital gains, food stampsand other government support programs, pensions and withdrawals from retirement accounts, Social Security, alimony and other support payments.